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March 30, 2016

Chapter 3: How Services are Traded in this Big Wide World

Recap: Services are so integrated into our society that we’ve turned them into verbs, i.e. “let me Google that”, or “I’ll just Uber over.” Services have not only helped us live our lives a little easier, they have given opportunities to individuals interested in starting a small business and larger companies eager to innovate for their customers.

In the last couple of posts I discussed what services are, and how they shape our society. In today’s post I want to delve into how services are traded. All types of professions have their internal language and use roughly one million acronyms to explain their work. I want to introduce you to some trade lingo you can use when debating each presidential candidates’ stance on trade (or you know…just to have in your back pocket for fun).

To start, let me give you a quick rundown of the World Trade Organization (WTO).

The WTO is the international body that discusses, votes, and implements international trade rules and standards. Established in 1995, the organization currently has 162 member-states. At its heart the WTO develops multilateral agreements (i.e. agreements agreed upon by all WTO parties) which are negotiated and signed by the member-states, then sent to be ratified in their parliaments (or in our case, Congress). The General Agreement on Trade in Services (GATS) was the first multilateral agreement negotiated in the WTO to provide rules governing services trade. Basically, it’s the godfather of services agreements.

To be brief, the GATS requires that foreign services companies are treated in the same, fair manner as domestic services companies when they participate in an economic market. That requirement is otherwise known as national treatment. Within the agreement, countries can decide which services sectors they want to open to the global market. To help them categorize (and liberalize) certain types of trade, the GATS created “modes of services trade”. Modes of trade = how international services are supplied and consumed. So, how are services traded?

  • Mode 1-Cross Border Trade. This may be the classic example of how we view trade. Mode 1 is when a service physically or electronically crosses a country’s border to enter into another country. According to Facebook’s statistics, at the end of 2015 roughly 83.6% of their 1 billion daily active users were outside of the U.S. and Canada. Globalization is real people. As another example, I would be lost without BBCA…all my favorite TV shows come from the BBC. Sherlock? Doctor Who? Those characters are timeless!
  • Mode 2-Consumption Abroad. When you travel to a new country, you are actually performing one type of trade! Mode 2 mostly covers services that we consume when we cross the border into a new country (generally as tourists). A good example is study abroad programs around the world. During undergrad I studied abroad in Argentina. Besides giving Argentina a small fortune in exchange for dulce de leche ice cream, I had an awesome four months speaking Spanish and immersing myself in Argentinian culture.
  • Mode 3-Commercial Presence. IBM (a CSI member) has locations in Africa, Asia, Australia, Europe, Latin America, and North America…basically all the continents except for Antarctica. They employ hundreds of thousands of people around the world, and are a perfect example of participating in Mode 3 trade. As the title depicts, Mode 3 is when a company has an active physical presence in a foreign market, whether through a locally-established affiliate, subsidiary, or representative office.
  • Mode 4-Movement of Natural Persons. Mode 4 encapsulates those of us who get to travel for work (you lucky, lucky people). Whether it is a doctor traveling to Nigeria to help fight malaria or a consultant traveling to Italy to help a client, individuals who cross the border to provide services fall under Mode 4 trade. If I may place an extra-large ATTENTION sign here: Mode 4 has nothing to do with immigration. Just in case you were wondering. I would love to devote an entire blog post to explain the differences in the future…so stay tuned for that!

I hope this post clarifies how services are traded. As you’ve probably guessed, how we’ve traded services has changed a lot since the Internet was born. Currently, all the ways that individuals and businesses trade via the Internet hasn’t really been reflected in trade agreements (which set the standards and rules for global trading). Next time I’ll throw some more acronyms at you as I place services trade in the context of trade agreements. See you soon!

 

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